- Charlotte Tsang
Russia’s tensions with Ukraine
A home in 2030 can become completely detached from traditional fuels and in turn benefit not only the environment, but also household bills.’Investors taking a bottom-up securities selection approach are likely able to uncover companies that could benefit from structural changes through a robust, intellectual and disciplined framework.BentallGreenOakFor older buildings, retrofitting a home is not an easy task, but it is essential to achieve these targets.Information technology valuations have shown a marked divergenceFrom the use of renewables such as solar power to the latest technologies, including heat pumps and smart meters, the homes of the coming decades will need to become net zero. This is important for both environmental reasons, so as to keep global warming below 2 degrees, and for social reasons, given the volatility of oil and gas prices.Given the rising cost of raw materials needed for building energy production facilities, coupled with supply chain issues, companies involved in the energy transition story may experience pressure on their bottom line.
Mitigating risk through a multi-asset approachThe production cost of renewable energy is expected to decline further as technological advancements in battery storage and electricity grids continues.Long-term trends support semiconductor demandHankow RoadAnnounced capacity additions have mostly been in the logic foundry space and are centred quite heavily on China. We are less concerned on the memory side given high industry consolidation and large barriers to entry.Despite the current fossil fuel issue, energy transition is already an inevitable trend given the increasing challenges of climate change and energy supply shortages.At the same time, countries will be financially discouraged from using gas boilers in buildings, and will have the power to ban the use of fossil fuels altogether.Schroders CapitalEnergy transition is closely related to “environment and sustainability", and we have been optimistic about this theme since early this year.Tsim Sha TsuiInvestors should be mindful that risks are still in play, including geopolitical tensions and the possibility of stagflation, all of which points to a potential low growth, high inflation environment.This not only creates a favourable environment for accelerating energy transition, but also presents long-term opportunities for investors.Buildings remain the largest energy consumers in Europe, making up 40% of the total energy used, and emitting 36% of greenhouse gas as most of them are still powered by fossil fuels, according to the EC.So, although we would never say the semiconductor industry isn’t cyclical, it is in our view a cyclical industry that has a strong long-term growth outlook.
The average EV has semiconductor content of c.US$1,000, given all the semiconductors needed to manage the battery, powertrain, driving and cabin functions. This compares to c.US$400 on a typical combustion engine vehicle (figures from ST Microelectronics, the French chip maker).Similarly, 5G mobile handsets require huge numbers of extra chips to manage the power and connectivity functions and, in most countries, we are at the start of the replacement cycle.Alexander Monk, portfolio manager, global resource equitiesBitmapBitmapBitmapBitmapBitmapBitmapThe buildings in which we live and the energy they consume play a fundamental role in the process of decarbonisation.From an investment standpoint, there are hundreds of EV start-ups in China and around the world, and it’s very difficult to gauge which ones will succeed and which will fail. What we do know is that all the cars they produce will consume an enormous amount of semiconductors.We are, however, not overly concerned for the broad industry.Following the invasion of Ukraine by Russia, the European Commission (EC) has launched the ‘REPowerEU’ initiative.Elsewhere, China is also a powerhouse in driving the energy transition story.‘Decarbonising homes is a very important task in the energy transition process.
From a macroeconomic perspective, we expect high energy prices to persist, which could elevate this year’s global inflation from 3.8% in our November 2021 forecast to 4.7%.Global leaders at the COP26 Climate Summit have pledged to step up their efforts in tackling climate change with environmental policies that could achieve a green, low-carbon future. The Russia-Ukraine conflict has brought the fragility of the global fossil fuel supply to the forefront, and further highlights the importance of transitioning to the use of economically viable, reliable, and clean renewable energy.But what of worries about supply? Semiconductors have been in high demand, leading to near-term shortages but also to plans for rapid capacity increases. We do expect to see oversupply in certain areas given the large number of plans for new semiconductor plants that have been announced.As one of the fastest-growing countries in renewable energy production, China has announced a series of ambitious targets, such as reaching peak carbon emissions by 2030 and achieving carbon neutrality by 2060.Going back to the chart above, we think investors in Asia have perhaps focused too much on the short term and are missing the long-term trends.As one of the world’s major oil and natural gas providers, Russia’s tensions with Ukraine not only disrupted energy supplies, but also triggered shockwaves in commodity markets.Green hydrogen produced from renewables, although is still in an experimental phase, is a potential solution: solar energy can produce hydrogen, which can then be stored and converted back to electricity.Lofter GroupTech innovation and policy to drive further developmentYet the disconnect in valuations between Asian and global tech valuations has never been larger than in the past few months (see chart below).